IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I : NEW DELHI
BEFORE SHRI R.S. SYAL, AM AND SMT. DIVA SINGH, JM
ITA No.417/Del/2011
Assessment Year : 2004-05
DCIT, Vs. Exxon Mobil Gas (India) Pvt. Ltd.,
Circle 11(1), Suite No.36, The Imperial,
Room No.312, Janpath,
CR Building, New Delhi.
New Delhi.
PAN : AABCE1792K
(Appellant) (Respondent)
Assessee By : Shri Mukesh Butani, Advocate
Department By : Shri Yogesh Kumar Verma, CIT,DR
ORDER
PER R.S. SYAL, AM:
This appeal by the Revenue arises out of the order passed by
the CIT(A) 29.11.2010 in relation to the assessment year 2004-05.
2. The only issue raised in this appeal is against the deletion of
addition of `45,41,519/- on account of transfer pricing
adjustment.
ITA No.417/Del/2011
3. Briefly stated, the facts of the case are that Exxon Mobil is a
multi-national group of companies engaged in oil and gas
industry. It conducts business in almost 200 countries. Its major
business is to discover, access, develop, refine and market oil and
gas resources. The assessee, an Indian company, is part of this
group, which conducts market survey activities and renders
related advisory services to its associated enterprises (AEs). Four
international transactions were reported by the assessee in its
Form No.3CEB. The only international transaction disputed in the
present appeal is `Conducting market survey activities and
related advisory services' for which the assessee was paid
`4,89,60,262/-. The other three international transactions were
accepted by the TPO at arm's length price (ALP). The assessee
adopted Transactional net margin method (TNMM) as the most
appropriate method, with Profit level indicator (PLI) of Operating
Profit to Total Cost (OP/TC), to demonstrate that the international
transaction was at arm's length price. Twelve companies were
selected by the assessee as comparable. By adopting the
multiple-year data of these companies, the assessee computed
their average operating profit margin at 4.46% and, accordingly,
2
ITA No.417/Del/2011
showed that its international transaction was at ALP. The TPO
rejected the use of multiple-year data and resorted to the current
year data alone. In doing so, he noticed that only eight
companies were left out of those twelve chosen by the assessee
because the current year data of the remaining four companies
was not available. The TPO computed average of OP/TC margin of
these eight companies for the financial year 2003-04, at 17.96%.
By applying this profit margin, a transfer pricing adjustment of
`45,41,519/- was proposed, which amount was added by the AO
in the assessment order.
4. At this juncture, it is pertinent to mention that there is no
dispute on any aspect of the addition on account of transfer
pricing adjustment other than the calculation of OP/TC margin of
Engineers India Ltd. (EIL), one of the companies chosen by the
assessee as comparable in its transfer pricing study by showing
its margin of 37.41% for the current year, which stood adopted by
the TPO as such without any alteration.
5. The assessee filed a rectification application before the TPO,
urging that the correct OP/TC margin of EIL was 6.98% and the
3
ITA No.417/Del/2011
same be taken. The TPO rejected this contention on the ground
that the assessee had itself worked out the profit margin of EIL at
37.41% for the current year. The same issue was espoused
before the ld. CIT(A), arguing that the OP/TC of EIL should be
taken at 6.98%, as was demonstrated by the assessee through
Annexure-I filed along with rectification application. The ld. CIT(A)
concurred with the submissions advanced on behalf of the
assessee and ordered for the adoption of OP/TC of EIL at 6.98%.
After considering the fact that the resultant average margin of the
eight companies, with new margin of EIL at 6.98%, came within
(+)/(-) 5% range, he ordered for the deletion of the addition. The
Revenue is aggrieved against the deletion of this addition to the
extent as aforestated.
6. We have heard the rival submissions and perused the
relevant material on record. Shorn of unnecessary factual details,
it is noticed that the core of the controversy before us is the
calculation of OP/TC of EIL. There is no dispute on the fact that
the EIL has been taken as a comparable company on entity level
and not on a segment level. Simply put, the issue before us is
cabined to the extent of calculation of correct OP/TC of EIL for the
4
ITA No.417/Del/2011
purposes of inclusion in and ex consequenti averaging the same
in respect of the eight comparable companies. We want to clarify
that the action of the TPO in using the current year data of
comparables, as against the multiple-year data initially chosen by
the assessee, is not agitated on behalf of the assessee. From the
multiple year data of OP/TC of EIL, it can be seen that the
assessee had itself shown the margin for the current year at
37.41% in its TP study and the same figure was adopted by the
TPO in its order. Now, the assessee is putting forth an argument
that this profit percentage is not correct.
7. In principle, we find no reason to restrict the right of the
assessee to assail the correctness of the figures submitted in its
TP study. If a figure was wrongly taken by the assessee
inadvertently, there should be no disqualification to later on
contending that it should be substituted with a correct figure. The
appropriateness of such a contention, if made, needs to be
judged at the end of the Revenue, without rejecting it at the
outset. Precisely, this is the argument which was raised by the
assessee before the TPO in rectification proceedings asserting
that the OP/TC of EIL at entity level should be correctly taken at
5
ITA No.417/Del/2011
6.98% instead of 37.41% shown in its TP study. The ld. CIT(A),
was albeit right in accepting this argument for evaluation, but
appears to have been swayed by the delineation of the
correctness of this figure, without either independently properly
examining the same at his end or obtaining a remand report from
the AO/TPO on this aspect of the matter. An analysis of the Profit
& Loss Account of EIL, which is available on page 285 of the paper
book, in conjunction with such calculation given through
Annexure-1 on page 109 of the paper book, divulges some
apparent inconsistencies. It can be seen that the amount of
`Other incomes' has been taken in the Annexure-I at `174.64 lacs,
whereas the actual amount of `Other income' in the Profit & Loss
Account of this company stands at `4,809.63 lacs. On being
questioned from the ld. AR about the reasons for the difference in
such figures, which ultimately culminated into the overall
difference in the calculation of OP/TC, the ld. AR submitted that
the figure given in the Profit & Loss Account contains both
operating and non-operating incomes, whereas the calculation
under TNMM calls for the adoption of operating income. It was
submitted that out of the total `Other income' of `4,809.63 lac,
6
ITA No.417/Del/2011
the operating `Other income' was `174.64 lac, which was taken
up for calculation. We have perused the details of `Other income'
given on page 293 of the paper book, being Schedule-G to the
Annual accounts of EIL. One of the items contained in this
schedule is `Miscellaneous income' amounting to `173.54 lac,
which, in the opinion of the ld. AR constituted the lone operating
income that was included in the calculation of OP/TC at 6.98%.
We agree with the contention of the ld. AR that TNMM
contemplates the taking of operating profit to a suitable base and
in this process the items of non-operating income are liable to be
excluded. At this stage, one needs to appreciate the difference
between the operating profit and net profit. Whereas, operating
profit is excess of operating revenue over operating costs, net
profit encompasses the effect of both the streams, viz., operating
and non-operating. Revering to the operating profit, it represents
the difference between the operating income and operating
expense. The argument of the ld. AR for adoption of operating
income, also extends with full vigor to the expense side. In other
words, not only the non-operating items of income are required to
be excluded, but the items of non-operating expense should also
7
ITA No.417/Del/2011
be expelled from the calculation of the operating profit of a
company. Ignoring the items of non-operating income without
simultaneously reducing the items of non-operating expense,
gives a distorted figure of operating profit.
8. Coming back to the facts of the instant case, we find that the
major item of `Other income' is Interest income aggregating to
`3,776.65 lac, which rightly deserves exclusion from the
operating profit. When we compare other figures from the Profit
& Loss account of EIL and the Annexure-I, it comes to light that
the figures of all the expenses tally. To put it simply, the
assessee took all the expenses, including the non-operating
expenses, in the calculation of operating profit of EIL. It is but
natural that if the items of non-operating income are to be
excluded from the computation of operating profit, then the items
of non-operating expense should also be excluded. One-sided
exercise has been done with the obvious reason to bring down
the OP/TC of EIL at 6.98%. Prima facie, it appears from page 295,
being Schedule-H containing details of `Corporate cost', that it
includes Bank charges to the tune of `172.79 lac. It is manifest
that the bank interest expenditure, like bank interest income, also
8
ITA No.417/Del/2011
assumes the same character of non-operating nature. It is not too
far to seek the reasons for the omission of such cost from the
total operating costs. Similarly, there can be other non-operating
expenses as well, finding their place in the details of total
expenses incurred by EIL, which have not been excluded by the
assessee. The net effect of the exercise carried out by the
assessee in calculating OP/TC of EIL at 6.98% by taking the figure
of operating income on one hand and total expenses (both
operating and non-operating) on the other is patently misleading,
inasmuch as the figure of profit so computed is neither operating
profit nor net profit. It lies somewhere between the two as it has
become excess of operating income over total expenses (both
operating and non-operating). In our considered opinion, the view
canvassed by the ld. CIT(A) in accepting the correctness of the
assessee's calculation of OP/TC of EIL at 6.98% at its face value,
cannot be sustained because of the apparent flaws as discussed
above. Under these circumstances, we set aside the impugned
order on this issue and remit the matter to the file of the AO/TPO
for a correct de novo determination of the OP/TC of EIL. After
doing this exercise, the TPO will compute ALP of the international
9
ITA No.417/Del/2011
transaction as per law. Needless to say, the assessee will be
allowed a reasonable opportunity of hearing.
9. In the result, the appeal is allowed for statistical purposes.
The order pronounced in the open court on 13.11.2014.
Sd/- Sd/-
[DIVA SINGH] [R.S. SYAL]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated, 13th November, 2014.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
10